The rise of the contingent workforce

Companies are taking a strategic approach to hiring contingent workers, whether as a cost-saving measure or a way to find skilled staff at short notice, says Catherine Mazy. But there are also legal risks to consider.

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Companies are increasingly applying ‘Just-In-Time’ principles to recruitment through the use of contingent workers who can be cheaper, more flexible and quicker to hire. ‘Employers have more choice about how they get things done,’ says Tom Hadley, director of policy at the Recruitment and Employment Confederation, a London-based industry organisation. Some want to outsource non-strategic operations to contractors to focus on their core business. Others, especially in the construction sector, see contingency staff as a quick way to respond to fluctuating demand. In the tech sector, contingent workers help reduce risk when entering a new market.

Unsurprisingly, the practice has spread rapidly. Contingent workers account for up to 40 percent of the US workforce, depending on one’s definition. They can include independent contractors, self-employed individuals, freelancers, temporary agency workers and individuals working full-time or when they want via online platforms. In the UK, there are an estimated two million freelancers, many of whom are ‘gig’ workers, who use digital platforms on a short-term, pay per task basis. A Deloitte survey revealed that half (51%) of executives plan to increase their use of contingent workers in the next three to five years.

According to a Resolution Foundation survey, some two-thirds (65%) of UK companies turn to agency workers as a stopgap measure, while one-third (34%) now take a strategic approach to hiring. ‘It used to be ad hoc 15 or 20 years ago,’ says Kevin Barrow, partner at Osborne Clarke LLP, an international legal practice with expertise in contingent workforce issues. ‘Line managers would circumvent HR and just pick up the phone and get somebody.’ Gradually, procurement departments took control of engaging on-demand workers as finance directors realised the huge amount of spending on staffing companies. Human resources departments then stepped in, ‘taking the view that what’s important isn’t cost savings but access to talent,’ he says. HR started to view contingent workers as part of their ‘total talent management’ strategy.

To some extent, these decisions vary according to company size and the particular skills sought. According to an EY report, around three-fifths (62%) of large companies considered contingent workers as a cost-saving measure, while a similar number (58%) of mid-market-size companies (with revenue of £72m- £3.5bn) viewed this as a way to complete projects requiring specific expertise.

‘Line managers would circumvent HR and just pick up the phone and get somebody.’

Hadley agrees that for many companies, ‘a bigger factor than reducing cost is bringing in skills quickly at a time when it’s hard to recruit permanently.’ This is particularly the case when an interim hire is necessary to keep a business running until a permanent recruit is found. ‘By the time you’ve done interviews and they’ve given their notice, you’re talking two or three months before they can start. The benefit of using an agency is you can ring now and have a temp by the end of the week.’

In some knowledge fields, such as engineering, information technology and medicine, ‘the only way you can get certain types of skilled people is on a contingent basis because that’s what people prefer to do,’ Barrow says. Such sought-after skills can command premiums. In low-skilled jobs, short-term workers are likely to receive lower wages than comparable permanent staff.

Despite their obvious benefits, contingent workers come with operational problems, such as conflicts of interest, low engagement, quality control, and intellectual property protection. Much of this can be mitigated with more thorough background checks, though only half of companies conduct these for their contingent hires, compared with 91% that vet full-time, salaried workers.

Perhaps more important are the legal and tax risks. ‘Contingent workers are often cheaper because they are engaged in a way that involves some tax efficiency,’ Barrow says. But if tax authorities decide that a worker was incorrectly classified as self-employed, the end user or temp agency may be liable for unpaid tax.

And it’s easy to fall into this trap. ‘Businesses are spending a lot of money to be seen as good places to work,’ says Hadley, and want ‘to make an effort for their contingent workforce.’ But well-intentioned efforts, whether by the recruiter or the agency, can backfire. ‘The more they are included and integrated into the workforce, like inviting them to parties and giving them training as to how to do their jobs,’ warns Barrow, ‘the more courts can say they are really your employees, triggering tax and employment liabilities.’

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